The Directional Movement Index or DMI is a momentum oscillator that was developed by J. Welles Wilder in 1978 to identify the overall direction of the market, whether it is trending or trading (moving sideways). DMI is a bounded oscillator that ranges from 0 to 100. It is also consisted of two distinct lines, the positive directional indicator (+DI) and the negative directional indicator (-DI).
The positive directional movement indicator (+DMI) measures how strongly the market is moving upwards; the negative directional movement indicator (-DMI) measures how strongly the prices are moving downwards. Wilder recommended to use the 14-period both for +DMI and –DMI.
DMI is very useful especially in trending markets as it can generate strong buy and sell signals. When the +DI crosses above the –DI, it is a strong buy signal. When the +DI crosses below the –DI, it is a strong sell signal. However, it is highly recommended to use filters to avoid any whipsaws.
The Average Directional Index or ADX is derived from this indicator.